UNISEM's 1HFY24 results met expectations. The green shoots of recovery could be seen in almost a doubling in Its 2QFY24 net profit sequentially, driven by an improved showing from its plant in Chengdu while the earnings decline at its plant in Ipoh has already bottomed out. We keep our forecasts, TP of RM3.70 and MARKET PERFORM call.

UNISEM’s 1HFY24 core net profit of RM25.2m (-25.4% YoY) only accounted for 15% and 17% of our full-year forecast and the full-year consensus estimate, respectively. However, we deem it within expectations as we expect a much stronger 2HFY24 as its recovery gains momentum.

YoY, its 1HFY24 revenue inched 3.6% higher, driven by resilient orders from its Chengdu plant which was operating at c.75% utilisation rate. This was led by robust loading volume from its key automotive customer, which accounted for c.35% of Chengdu’s revenue, and c.20% of the group’s revenue. Additionally, a significant contribution came from a MEMS microphone-related customer, with the product being used by a US smartphone manufacturer. Meanwhile, the Ipoh plant continued to operate at sub-optimal levels of 45%-50% due to subdued orders (albeit having bottomed out) from its legacy customers in the smartphone radio frequency (RF) related space.

Its net profit declined by a sharper 25% due to higher costs of materials, utilities and personnel (on an expanded headcount of about 6,300, vs. around 5,700 in 1HFY23).

QoQ, its 2QFY24 top line grew by 8.2% while net profit almost doubled thanks to positive operating leverage coupled with favourable currency movements resulting in a realised forex gain of RM2.5m (vs. a RM4m forex loss in 1QFY24). Its 2QFY24 profits were solely contributed by its plant in Chengdu.

Outlook. The group guided for sequential revenue growth of 8% to 10%, mainly driven by its plant in Chengdu due to better forecasts from its key US automotive customer and the European MEMS-microphone customer, which should boost its utilisation to 80%-85% (from 75%). This also explains the need to increase its headcount.

The same cannot be said for its plant in Ipoh of which utilisation is expected to remain subdued with only a marginal sequential uptick to 55% (from 45%-50%), driven by customers related to sub-6GHz radio frequency power amplifiers used in Korean smartphones, and AI- related high-powered RF transmission chips for a US customer. Prospective customers for its plant in Ipoh include: (i) existing key automotive customer in the Chengdu plant diversifying additional volume to the Ipoh plant, (ii) component for air-conditioning related customer from Japan currently undergoing qualification with possible significant revenue in 2025, and (iii) a new customer related to NAND flash for its Ipoh plant, expected to commence pilot runs in 2HFY24, coinciding with the setup of new pilot lines for internal qualification at its new Gopeng plant.

Forecasts. Maintained.

Valuations. We keep our TP of RM3.70 based on an unchanged PER of 29x pegged to FY25F EPS, in line with its peers’ average. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Investment case. We like UNISEM for: (i) its healthy presence in the power module business, (ii) being able to benefit from the China+1 initiative, and (iii) a strong balance sheet to support its expansion plans. However, its fundamentals have been fully priced in by the current share price. Maintain MARKET PERFORM.

Risks to our call include: (i) a weaker-than-expected recovery in global consumer electronics demand; (ii) intensifying US- Sino chip wars; and (iii) a steep depreciation of the USD against the MYR.

Source: Kenanga Research - 1 Aug 2024